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Decision Theory Models of Information and Consideration

Abstract

This dissertation develops axiomatic models to identify two important elements that influence choice behavior: knowledge and consideration. Furthermore it analyzes the behavioral and welfare implications that these models have.

First, information (knowledge) about uncertainties plays an important role in a decision-maker's choices and it is usually taken as an explicit part of economic models. However, in many situations it cannot be observed, so it should be derived. This dissertation provides foundations for the identification of information from choice behavior represented by preference. From a classical statistical point of view, models of preferences over single elements cannot capture the role of information in a decision problem. The research on this dissertation shows that by considering the richer primitive of preferences over menus of state-contingent outcomes, if the preferences satisfy some conditions it is possible to uniquely identify private knowledge about future uncertainties. To expect information is necessary to exhibit a desire for flexibility, therefore a preference for flexibility is instrumental for the identification of information. In addition to providing a characterization of a preference for flexibility, this model gives a comparative notion of being informed as aversion to trading menus for menus of certainty equivalent options. Consequently, with this representation it is possible to assess the value of information for a problem and determine what type of options provide flexibility to a decision-maker.

Secondly, identifying what a decision-maker considers is important for economic analysis because the classical revealed preference model implicitly assumes that decision-makers consider all available options, which are known by an analyst. However, there is well-established evidence that decision makers consistently fail to consider all available options. Instead, they restrict their attention to only a subset of it and then undertake a more detailed analysis of the reduced sets of alternatives. This systematic lack of consideration of available options can lead to a ``too much choice" effect, where excess of options can be welfare-reducing for a DM. Building on this idea, this dissertation models individuals who might pay attention to only a subset of the choice problem presented to them. Within this smaller set, a decision maker is rational in the standard sense, and she chooses the maximal element with respect to her preference. This dissertation provides testable characterization results for choice behavior under different consideration structures, which are inspired by psychological evidence. First, one such condition is that awareness is a function of the quantity of options available: the more options the more likely it is to ignore available options; secondly the other conditions states that decision-makers are unaware that they did not consider something. This dissertation characterizes to which options the decision makers must pay attention to at each set, which elements are revealed preferred to which, and discusses welfare implications.

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